With the start of a new year and a new decade what is the outlook for investors? Normally you might start with the question – where are we in the economic cycle? Are we early stage expecting recovery or expansion or late stage expecting a slowdown or recession? In an interesting article co-authored by the excellent Karen Ward, a Chief Market Strategist at JP Morgan, they conclude it is difficult to tell. Logically with an expansion lasting more than 10 years since the global financial crisis and with record low unemployment in most parts of the developed world you would think we are late stage. However there does not appear to be the classic signs of end of cycle exuberance. Business and consumer spending is not excessive and the US consumer savings rate is holding up, normally it falls at the late stage of the cycle. Also we don’t have runaway inflation. On the contrary central banks are worried about economic growth and inflation being too low! Consequently monetary policy remains loose and highly accommodative, with ultra-low interest rates being very supportive of equities.
I think pretty well everyone agrees that economic growth has been weak and slow during this long period of expansion and with a phase 1 trade deal between China and the US it is not unreasonable to conclude that the longest bull market for equities in history is set to continue in 2020. However JP Morgan note that valuations are less attractive than this time last year and there is a risk of slowing corporate profits growth. For example company margins will be squeezed by wage demands caused by skilled labour shortages. JP Morgan also think manufacturing is flying a red flag for recession risk and they see ongoing geo-political risks for example disputes on unfair trade practices and other areas of disagreement between the US and China. Resolution and certainty will feed through to business confidence and investment but the opposite is true. In other words geo-political risk has binary outcomes which are tough to call. Who knows for example how events will unfold between Iran and the US?
From an asset allocation perspective JP Morgan favour a regionally neutral defensive equity position. I broadly concur but at the same time Jon Cunliffe, Chief Investment Officer of Charles Stanley observed in a blog for intermediaries that UK equities were very attractively valued compared to both 10 year gilt yields and their European counterparts whilst Sterling’s recovery was a potential draw for overseas investors. I also noted from the JP Morgan article that the Bank of Japan is a buyer of equities and with reform in corporate governance this market remains one I favour. Finally both commentators highlighted the importance of ESG investing. ESG is environmental, social and governance. Investor demand for responsible capitalism will be an increasingly important driver of investment returns.
The content of this blog is based on my own understanding of selected points made in the two articles referred to. It reflects my personal views and is intended as general investment information only. Nothing in this article should be construed as personal investment advice for example to invest in UK or Japanese equities. You should seek individual advice based on your own financial circumstances before making investment decisions.